Breeders' Cup Bets On Big Investment

LOUISVILLE, Ky. ( TheStreet) -- It's not the Super Bowl or even the Triple Crown, but sponsors, bettors and racing enthusiasts alike know the Breeders' Cup is the moneymaking equivalent of a mid-Fall Final Four.

On Nov. 5-6, $26 million in purse money, more than $40 million in revenue and more than $175 million in wagers -- nearly double the amount bet on this year's Super Bowl -- are on the line as 65 qualifying races in eight countries come down to these last legs. Zenyatta's quest for her third-straight Breeders' Cup victory and a 20-0 race record will steal the race-day headlines, but the millions changing hands behind the scenes will affect the race industry, sponsor companies and various coffers for years to come.

More than $175 million in wagers at this year's Breeders' Cup, but there are other ways to get invested in the event and culture of horseracing and breeding.

Greg Avioli, president and chief executive of Breeder's Cup Limited, which operates the Breeder's Cup World Championship, deserves much of the credit for making these little races at Churchill Downs ( CHDN) in Louisville so lucrative. CEO since 2006, Avioli changed the race format in 2007 to include dozens of qualifying races in the U.S., Australia, Canada, Hong Kong, France, Germany, the United Kingdom and Ireland. This led to a record 34 international entries in last year's Cup, a partnership with U.K.-based Internet gaming company Betfair and its 3 million customers and more than $50 million in international wagers last year.

He was also responsible for the event's eight-year broadcast partnership with Disney's ( DIS) ESPN that began in 2006 and brought the event to more than 180 million households in 120 countries. Why go to such great lengths to attract a global audience? Because U.S. horse racing has two to three events that bring in more than $100 million in wagers (the Kentucky Derby, Breeders' Cup and Belmont Stakes, if the Triple Crown is on the line). Hong Kong, meanwhile, runs two races a week 40 weeks a year, with each bringing in more than $100 million in wagers.

TheStreet.com spoke with Avioli about the high stakes of his event and how big payouts, bigger bets and billions in expendable income present a tempting trifecta for savvy investors or sponsors willing to play the ponies:

What does it take to put this event together and keep it growing?

Avioli: While money alone doesn't make an event, in the case of trying to build a world championship where you're trying to attract the top horses from eight or nine different countries, you have to have a level of prize money that's sufficient to get their attention. That purse started out in 1984 at $10 million and it stayed relatively stable at $14 million until 2006. In my first year here, we raised it on the existing eight races to $20 million. Over the last couple of years, we kept inching up to where we have 14 races and $26 million.

Where does that purse money come from?

Avioli: It's a combination of what we get from ticket sales from the event itself, entry fees horse owners have to pay to participate -- 3% of the purse, generating $8 million -- and, most importantly, the wagering. We are going to sell between $10 million and $11 million, which is double the total ticket sales of the Final Four. We get a tremendous amount of revenue for a two-day event from ticket sales, and that's largely because of the high-end VIP seats we can sell at $1,000 or more -- and we will sell probably north of 10,000 of those.

Where does that place you in the running with other races?

Avioli: We're lucky to be the biggest day of horserace wagering in the world and No. 2 in the U.S. behind the Kentucky Derby. The Kentucky Derby will do around $180 million on Derby day. We're not too far behind that. Last year we did $150 million in parimutuel and another $25 million in exchange betting over in Europe. We make, on average, about eight cents of every dollar that's bet, so we make another $12 million to $13 million on betting.

What kind of returns are your winners seeing?

Avioli: The average $2 straight bet returns $20, a $2 exacta returns $190 and a trifecta pays $2,000. We have something at the end of the event called the pick six, where you pick the winners of the last six races and that averages $390,000 on a $2 bet. We had a longshot win on a pick six in 1999 that paid $3 million to a local guy.

The Breeders' Cup brings in $6 million in sponsor revenue from such partners as Grey Goose, Montblanc, John Deere (DE), Kroger (KR) and Sentient Jet. Does a captive audience with enormous disposable income make it easier to attract luxury sponsors?

Avioli: We are a high-end brand and are a good fit with companies that are going after luxury consumers. When you look at a company like Sentient Jet that sells fractional ownership interest in private aircraft, there's a direct relationship between the people who have the ability to own or appreciate top thoroughbreds and the people who fly privately.

Is that the only draw?

Avioli: This year, we're going to have Workforce, the horse who won the English Darby D'Arc, try to become the first horse to win the Prix De L'Arc De Triomphe and the Breeder's Cup. We also have one of the greatest female horses of all time in Europe named Goldikova who's going to try, in one race, to become the first horse in front of Zenyatta to win three straight Breeders' Cups. We also have the Japanese champion, the horse that won Japan's biggest horse race last year, called Espoir City. We have champions from three continents, so when we talk to sponsors we can say that we'll not only have the biggest purses in the world but have the best horses in the world running. We'll also have many very influential and wealthy owners from around the world coming to watch their horses. Workhorse is owned by Prince Khalid Abdullah from Saudia Arabia, one of the two or three largest horse owners in the world. You're going to have horses from the very powerful Coolmore Stud in Ireland, led by John Magnier. Sheik Mohammed (bin Rashid Al Maktoum) from Dubai will have multiple entries. Even back to our bigger story with Jerry Moss and Zenyatta -- Jerry Moss founded A&M records and Zenyatta is named after the Police album Zenyatta Mondatta.

Since this is an event founded by breeders to promote the sport, what role does breeding still play in the event, and how lucrative is it for horse owners?

Avioli: There's a horse running this year named Paddy O'Prado. Paddy is a 3-year-old colt who ran third in the Kentucky Derby and was purchased for $100,000. Since he ran the Derby, his connections tried him on turf instead of on dirt and he won three straight Grade 1 races, and he's going to run that in the Breeder's Cup Classic. His owners have been offered $10 million for his stallion value and, if he is able to run in the Top 3 in the Breeder's Cup Classic, his breeding value will go up from $10 million to $30 million. Generally, your stud value goes up three to five times what it was if you're a stallion who sires a Breeder's Cup champion. If that horse stays healthy, you're talking about a 15- to 20-year revenue stream, but for every horse that makes it there are nine that don't.

Has the recent economic crisis affected that business at all?

Avioli: Before the recession hit, the top stallions in the country would have been Storm Cat and A.P. Indy, and their stud feeds would have been $300,000 to $400,000 to breed to a single mare. And they would generally be bred to more than 100 mares a year. That was the pinnacle of this business -- a $40 million to $50 million revenue stream off of one horse. Like everything else, those numbers have dropped 50% or more.

What's the best way for a novice to start investing in horse racing?

Avioli: There's a guy who's a Breeder's Cup trustee who founded a company called West Point Thoroughbreds, and they sell fractional interest in horses, so you get a piece of a horse in a partnership. They get a lot of partners from Wall Street. The way a lot of people who have no experience with a horse get into it now is owning a piece of a race horse. Much like with the stock market, it is best to own a broad portfolio with a number of horses, because the chances of one horse being a winner are very slim. It's very hard to make money on strictly racing.

Jason Notte is a reporter for TheStreet.com. His writing has appeared in The New York Times, The Huffington Post, Esquire.com, Time Out New York, the Boston Herald, The Boston Phoenix, Metro newspaper and the Colorado Springs Independent.